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Weekly Market Update for March 20, 2020

by Jim Ulland

This week the market continued to have huge swings of volatility. Here is the pattern for the S&P 500: Monday -12%, Tuesday +6%, Wednesday -5%, Thursday +.5%, and Friday -4%.  The S&P 500 was down 15% in total over the last five days.  So far this year, this index of the largest 500 companies is down 28.9%.  The index represents the largest companies, so it is easy to understand that small companies did worse.

Why are we seeing this abnormal fluctuation?  First, we all know the Coronavirus Covid-19 is the apparent cause of this market stress.  We know that the death rate is around 1% vs. .1% for the flu. The virus is contagious and about twice as contagious as the flu. The problem in using this as a market explanation is that we knew all of this last week too.  In fact, the virus news out of South Korea this week can be viewed as encouraging.  South Korea is only 15% the size of the U.S., so if you adjust their numbers to predict what could happen in the U.S., we would expect 596 deaths vs. their 94.  The deaths would come from 54,875 cases vs. their 8,652.  U.S. hospitalizations would run from 5,000 to 10,000.

If we have the same experience as South Korea, it is relatively good news.  Remember 40,000 people in the U.S. die on average annually from the flu out of the approximately 30 million infected.  Also, South Korea seems to be on the other side of the problem with fewer people being newly diagnosed vs. the number of recovered patience leaving the hospitals.

What seems to be the new information hurting the market is the reaction to the virus.  For instance, the Governor of California asked the entire state work force to stay home except for essential personnel.  If that goes on for more than two weeks, the economic crisis may be bigger than the health crisis.  That is what I think is the new concern of the market as evidenced by the lead editorial in the Wall Street Journal 3/20. The quickest resolution of this complicated problem would be the announcement of a vaccine or treatment.  There are several good prospects one of which is a 70 year old treatment for malaria called chloroquine phosphate.  There are others as well in the trial stage.   An announcement of success would turn the market.

In portfolios, we have continue our strategy of reducing equity exposure and leaving the cash generated in cash.  We resisted buying stock even though prices were getting more attractive.  The big news was in fixed income.  We had been battling a market with few buyers and thus prices of the preferreds were getting battered.  That situation changed on Thursday and liquidity returned to the market.  Buying was very active both Thursday and Friday.  Prices rebounded sharply and Nat was busy putting cash in fixed income accounts back into the market at yields of 6-7% on very high quality issuers.  We feel that 6-7% will be compelling to a lot more buyers as they compare this to the yield of 1% on US Treasuries.  For buying to continue at the aggressive levels of Thursday and Friday, we will need a somewhat stable market.  However, even with today’s volatility, preferreds were up strongly while stocks were down 4%.

Please call or email as needed.  Half of our staff is at the office and half working remotely.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

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Ulland Investment Advisors

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